Advantages and Limitations of Cost Accounting

Like any management tool, Cost Accounting delivers real benefits but also has genuine constraints that a student should be able to state clearly.

Advantages of Cost Accounting

• Helps in the accurate ascertainment of cost of each product/job/service, and hence in fixing a realistic selling price.
• Enables effective cost control by comparing actual costs against budgets or standards and investigating variances.
• Helps identify and eliminate wastage, inefficiency and idle capacity that would otherwise stay buried inside a single aggregate expense figure.
• Provides a sound basis for inter-period and inter-firm comparison of costs and efficiency.
• Assists management in critical decisions — make-or-buy, product mix, shutting down an unprofitable line, pricing a special order.
• Helps in fixing responsibility by relating costs to specific cost centres and the persons in charge of them.
• Provides reliable data for the correct valuation of inventory (raw material, work-in-progress, finished goods) in the financial statements.
• Assists government bodies and regulators in price fixation, tariff setting, and grant of subsidies for certain regulated industries.

Limitations of Cost Accounting

• It can be expensive to install and operate — the additional forms, records, and trained staff needed may not be justified for a very small business (a cost-benefit issue, not a flaw in the technique itself).
• Some cost figures unavoidably involve estimates and apportionment (e.g. dividing a shared overhead among several departments on some reasonable basis) — this introduces an element of subjectivity that a purely factual financial record does not have.
• It needs trained, competent staff to design and operate the system correctly; a poorly designed system can mislead rather than help. …